No banking cheer in the new year

With a pathetic refusal to countenance the real extent of risk in the system, the RBI still expects the condition of banks, particularly of public sector banks, to deteriorate. Policy uncertainty has abated, it says, bald-faced.Updated: January 02, 2017, 13:31 IST

The RBI's latest Financial Stability Report is sobering. With a pathetic refusal to countenance the real extent of risk in the system, the RBI still expects the condition of banks, particularly of public sector banks, to deteriorate. Policy uncertainty has abated, it says, bald-faced. As if withdrawal of 86% of the currency in circulation in a country where MasterCard says 98% of all transactions are in cash were a piece of policy certainty rather than a killer bolt from the blue.

In a similar vein, it asserts that overall risks to the corporate sector moderated in 2016-17, even as this newspaper reports that white goods sales are down 38% in November, construction is stuck, shoe and knitwear production has tanked, all thanks to demonetisation. Even without taking into account slowdown and worse induced by demonetisation, the RBI expects banks to lend less in the near term. In the good, pre-demonetisation month of September, the stressed assets of the banks had already increased to 12.3%, from 11.5% in April. When industry experiences sharp contraction in demand in the concluding October-December quarter and expects little better in the next, expect more loans to turn sour and rule out any mad rush to invest in fresh capacity.

Without demand for loans and increased risk aversion, given the ongoing build-up of bad loans, lending would stall further. Now, given that banks have taken on additional deposits from the public almost to the full extent of Rs 500 and Rs 1,000 notes that were in circulation, have to pay at least 4 per cent interest on these deposits and can park only half this amount with the central bank using its reverse-repo window, expect bank finances to worsen further.

A systemic risk survey completed in October 2016 was itself rather downbeat. Out of 34 categories of risk, the survey rated only 11 to be very low or low, leaving 23 to be rated as medium to high risk. Cyber security , credit growth, asset quality , capital adequacy , infrastructure creation and corporate profitability were already considered high risk then. Demonetisation has only increased the risk.

This piece appeared as an editorial opinion in the print edition of The Economic Times.

This Website Uses Cookies

We use cookies to personalise content and ads, to provide social media features and to analyse our traffic. We also share information about your use of our site with our social media, advertising and analytics partners who may combine it with other information that you've provided to them or that they've collected from your use of their services. Give your consent to our cookies for: